BUENOS AIRES Argentina's markets watchdog on Monday launched an investigation into what it believes may have been unlawful speculation by holdout creditors whose litigation against the country for repayment of their defaulted bonds pushed it into a new default last week.

The government also reiterated its fierce criticism of the mediator in debt talks with the holdout hedge funds for being "biased" and a "spokesman of the vulture funds".

Local markets were mixed on Monday as players waited for new signs of how soon Argentina might reach a deal with holdouts in order to exit default. Argentine bonds fell slightly while the Merval .MERV stock index flickered up and down.

The head of Argentina's Securities Commission Alejandro Vanoli said it had asked its U.S. counterpart for information on trade of Argentina's sovereign debt and credit default swaps (CDS), derivatives used to insure against default.

The watchdog wanted to check if holdouts who rejected Argentina's restructuring in the wake of its 2002 default held or traded CDS while they took part in negotiations with Argentina which could trigger a default.

"The use of insider information, which would be the case here, and market manipulation are crimes in Argentina, they are crimes in the United States, and they imply economic sanctions and eventually criminal sanctions," Vanoli told a news conference.

Over nearly the last two years, sources familiar with the position of the holdouts have told Reuters the firms are not holders of CDS positions. A new source said on Monday that this stance has not changed.

"There is absolutely no evidence to demonstrate that the holdouts hold Argentine CDS positions. No proof," said the source, who is familiar with the holdout positions.

Argentina missed a deadline at midnight last Wednesday to make a coupon payment on a restructured bond after failing to reach a deal with holdouts. A U.S. court had ruled Argentina could only service its exchange bonds if it at the same time paid holdouts in full their defaulted debt.

"We now think a settlement in 2015 is the most likely path although cannot exclude something longer," said Stuart Culverhouse, head of research at Exotix, a frontier markets broker in London.

On Friday, a committee facilitated by the International Swaps and Derivatives Association voted unanimously to call the missed coupon payment a "credit event", triggering a payout process on CDS worth an estimated $1 billion.

"The holdouts were awarded $1.33 billion and the interest too, right? Well there is just $1 billion in potential payout on the CDS and that would mean the holdouts would have to own all of it and that's simply not the case," the source said.

U.S. District Judge Thomas Griesa said last week Argentina must continue negotiations with mediator Daniel Pollack to reach a deal with holdouts. Argentina's Cabinet Chief Jorge Capitanich on Monday reiterated its criticism of the lawyer.

"We consider he has been incompetent.. that he has been manifestly partial and definitively does not fulfil the role a mediator should," Capitanich said in his daily briefing.

Griesa later on Monday came to Pollack's defense with an order stating that he confirms his position to remain the mediator in the case and that removing him would be a gross injustice and drastically interfere with the discussion process which he wants to continue.

"He (Pollack) has been even-handed in relationship to the parties. There has been no bias in any degree," Griesa said.

This default strikes a contrast to the last one in 2002, which occurred during an economic and financial meltdown that plunged millions into poverty and saw dozens killed in riots.

While Latin America's No. 3 economy entered a mild recession at the start of 2014, its banks are sturdy, the state is solvent and the streets of Buenos Aires are calm.

Underscoring the fact it is willing to pay its debts, Argentina said last week it had made the first payment of its debt arrears to the Paris Club of major creditor nations under an agreement struck earlier this year.

The club said on Monday it had received the $642 million tranche "as scheduled".

(Additional reporting by Leigh Thomas in Paris, Nessi Hernan in Buenos Aires and Daniel Bases in New York; editing by Andrew Hay)

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